The capitalist welfare state

The Christian Science Monitor has a long piece on Sweden (not mainly about economy, bur more cultural...) , citing me amogn many others

The welfare state needs to be lagom, says Dr. Bergh. Benefits can’t be so generous that they reduce work incentives, nor can taxes be so high that they frustrate the broad middle class.

James Pethokoukis blogs at AEI.org

Let’s stop pretending that Bernie Sanders wants to duplicate Scandinavia

He writes:

Bernie Sanders supporters are quick to make clear that their guy doesn’t want to turn America into Cuba or Venezuela or the old Soviet Union. By "democratic socialism," the US senator from Vermont means Scandinavia, more or less. And what’s wrong with that? The Nordic nations are pretty nice. Even President Trump has conceded that Norway produces a quality immigrant.

His point is that the scandinavian countries are in many aspects more capitalist and have higher economic freedom than the US, citing my text in the Milken Review.

Slides from my talk for the Student's Association at the Stockholm School of Economics are now available at slideshare.

Immediatly after the talk, I discovered yet another book on how to become more like Sweden:

I honestly thought the idea that Sweden somehow proves that socialism works had disappeared by now. Still, Michael Munger writes:

I am astonished at how many students, and for that matter adults, in the U.S. honestly believe that the U.S. should model itself after Sweden because Sweden has shown that socialism works.

He goes on to nicely demonstrate why this is simply not true (citing among other sources my book, Sweden and the revival of the capitalist welfare state).

In particular, Munger makes an important point regarding regulation, where I would encourage Swedish policymakers to use other nordic countries as a benchmark, not the U.S.

In terms of deregulation of business freedoms, measured in the Fraser Institute’s "Index of Economic Freedom," Denmark, Finland, and Norway are the 7th, 8th, and 9th most free; Sweden is 12th.

The U.S.? It is 15th. The U.S. is rapidly regulating new industries, and further restricting old ones, at the state level in particular. The expansion of professional "licensing" rules, supposedly for the benefit of consumers but in fact in support of organized corporate interests, is making the U.S. less capitalist every day.

A related question is if the U.S. could become more like Sweden if they wanted to. I think it might be difficult, because even for Sweden, becoming what the country is today, was a bumby road and involved a lot of trial-and-error as well as unintended consequences. I expand on those topics in my follow-up paper on Hayekian welfare states, currently being revised after some conference presentations and feedback. Here is the the most recent wp-version.
From the concluding section:

The lesson for other countries from the Nordics is thus not to copy the blueprint for the Swedish welfare state, for example, but rather to foster the state capacity needed for successful learning from experimentation. Trying to build a fiscally large welfare state without the fundamentals of state capacity and social trust may turn out to be a dangerous strategy. The fact that some countries succeed in combining a large public sector with high levels of economic freedom does not mean that all countries are able to do so.

Downloadable from Repec is a paper that describes the concept of a Hayekian Welfare State, and illustrates using several examples from Sweden.

Abstract:

The idea that all types of economic freedom – including limited government – promote prosperity is challenged by the fact that some countries successfully combine a large public sector with high taxes and otherwise high levels of economic freedom. To explain the co-existence of economic freedom and big government, this paper distinguishes between big government in the fiscal sense of requiring high taxes, and in the Hayekian sense of requiring knowledge that is difficult to acquire by a central authority. The indicators of government size included in measures of economic freedom capture the fiscal size but ignore the Hayekian knowledge problem. hinking about government size in both the fiscal and Hayekian dimensions suggests the possibility of Hayekian welfare states, where trust and state capacity facilitate experimentation and learning, resulting in a public sector that is big in a fiscal sense but not necessarily more vulnerable to the Hayekian knowledge problem. Pensions in Sweden are used as a case to illustrate the empirical relevance of the argument. The new pension system represents big government in a fiscal sense, but by relying on decentralized choice it requires relatively little central knowledge.

My latest piece on Sweden is out now in the Milken Review. This time I try to say something about how and why Sweden became the country it is today. Previously, I have focused on what happened, when did it happened and what the consequences were. Saying something about why it happened is much more difficult. In short, it is easy to paint a picture of wise intentional planning in retrospect, but that is typically not true when you look closer at what really happened. Serendipity and unintended consequences played important roles.

From the introduction:

The winding road Sweden has taken has made it difficult to say whether being more like Sweden involves increasing taxes and government intervention in the economy – or whether it means liberalization, deregulation and welfare-state retrenchment. So, before other countries try too hard to become more like Sweden, it is wise to look back at how Sweden came to be Sweden.

An example, based on the research of Thor Berger:

Historians point to the early introduction of mass public education, with the adoption of the 1842 Elementary School Act. The law, which stipulated that every parish must have at least one school, is often mentioned by contemporary politicians as a shining example of Sweden's long commitment to investment in human capital. The policy implication is seemingly clear: political decisions promoted growth early on by mandating public education. That may well be the case. But before jumping to that conclusion it is worth considering the analysis offered by the economic historian Thor Berger of Lund University. [...]

In short, education promoted economic development in Sweden, but democracy at the time did not promote education. Knowing more about what actually happened in Sweden hardly leads to clearer recommendations for other countries.

Released aug 12, 2016 is the following title

Order and read more here!

Here is my implicit point of view regarding the debate between Jenkins (2015) and Solt (2016):

Below is a table (Table 1) from Rudra (2004).

Do you notice anything strange about these Gini-coefficients? Hint: to verify inequality data, I always look at the country I know best, to see if data make sense...

Clearly, something is wrong with the data regarding Sweden in the 1970s. The table suggests that inequality in Sweden was at its lowest level in 1975 (at 27.3) and at its highest level just a year later, in 1976 (33.1). In a country like Sweden, inequality never jumps that much from one year to another, and for sure not in 1976. Reexamining the Deininger and Squire database, it turns out that the 1975 value comes from the LIS database, whereas the 1976 value is taken from Statistics Sweden. Most likely, the latter includes capital income and the former does not. Checking other figures reveals that mosty data for Sweden are net household income, but for Brazil gross income is used, and for China the unit is the individual, not the household.

Rudra is not alone. In fact, she is better than many other papers because the inclusion of a table like Table 1 above means that the errors are possible to spot by reading the paper closely. Often, D&S data are just added to the analysis without even a simple visual inspection, which means that the analysis uses incomparable Ginis.

One of the biggest benefits of Solt's Swiid, is that all Ginis are converted to the same typ (LIS-standard), and mistakes like these are avoided.

References:

Jenkins, Stephen P. 2015. "World Income Inequality Databases: An Assessment of Wiid and Swiid." Journal of Economic Inequality 13(4):629–71.

Rudra, N. 2004. "Openness, Welfare Spending, and Inequality in the Developing World." International Studies Quarterly 48(3):683-709. doi: 10.1111/j.0020-8833.2004.00320.x.

Solt, Frederick. 2016. "On the Assessment and Use of Cross-National Income Inequality Datasets." Journal of Economic Inequality (forthcoming).